You are the audit partner of Integrity Chartered Accountants ("ICA"), working on the audit of Darwin Tourist Buses ("DTB") for the 2019 financial year. DTB is a provider of luxury bus trips all around Australia, including both interstate capital city travel and conference and holiday packages.

The net profit before tax of DTB for the 2019 financial year is $14.5M while net assets total $232M.

You are reviewing the 2019 audit working papers and note that the assurance services senior has documented a number of situations that may lead to a breach of independence for ICA.

Situation 1

It has been documented that the DTB Financial Controller has gifted the three audit team members with two free luxury holiday packages each. The audit manager has concluded that the key threat to independence in Situation 1 is 'self-interest'.

Situation 2

The audit team has documented that DTB is intending to launch a new customer loyalty program. The CFO of DTB has guaranteed that if the audit team convince ICA and five of its biggest clients to sign an exclusive corporate travel arrangement with DTB, the audit team will receive immediate platinum status (normally requiring a customer to have accumulated one million points), giving them a host of benefits. The audit manager has concluded that the key threat to independence in Situation 2 is 'familiarity'.

Situation 3

The audit team has noted that ICA has put forward a proposal to DTB to provide consulting services. The CFO of DTB has told the audit team that if they do not remove comments in the audit summary review memorandum to be provided to the audit committee about a weakness in the revenue and receivables process, he will not award ICA the consulting work. The audit manager has concluded that the key threat to independence in Situation 3 is 'advocacy'.

Question:

(a) Explain whether the audit manager has correctly identified the key potential threat to independence for each of Situations 1, 2 and 3 above. Your answer should clearly identify what you believe is the key threat to independence in each situation.

(b) Identify the five fundamental principles of the Code of Ethics for Professional Accountants and explain why Ethics is very important to the Accounting Profession.